Dollar extends gain after Fed minutes; pound down

Yen reverses early gains scored on remarks by prime minister

V.Phani Kumar

LOS ANGELES (MarketWatch) — The dollar stretched an advance against its rivals Wednesday as the U.S. Federal Reserve indicated it will consider making changes in its ultra-loose monetary policy.

But the British pound hit a 13-month low as support for additional quantitative easing strengthened at the Bank of England.

The ICE dollar index
DXY, -0.10%
, a gauge of the greenback’s performance against a basket of six major global currencies, rose to 81.074 after the release of the minutes from the Fed’s meeting in January. The dollar index was at 80.450 on Tuesday.

The euro extended its loss against the dollar, with the shared currency
EURUSD, +0.1279%
fetching $1.3276, compared with $1.3337 late Tuesday.

Kathy Lien, managing director at BK Asset Management, said they saw the dollar climb as the market appeared to interpret the minutes as showing “that the Federal Reserve is getting more serious about phasing out asset purchases.”

According to the minutes, many Fed officials are concerned about the costs and risks of the central bank’s asset purchases aimed at stimulating the economy, and will look at how to proceed with its current $85 billion a month asset-purchase program at their meeting in March.

Some Fed officials, however, argued that ending assets purchases too soon would damage the economy.

Unemployment is still high, Lien noted, “and while there have been more voices at the central bank raising concerns about the negative risks of keeping quantitative easing in place for a prolonged period of time, [the Fed] won’t get serious about tapering assets purchases until the third quarter,” or the fourth quarter.

“We need to see a lot more evidence of improvement and stability not only in the labor market but also in consumer spending before the Federal Reserve has the backing to start shrinking the balance sheet,” she said.

The WSJ dollar index
BUXX, -0.13%
, which measures the greenback’s moves against a slightly wider basket of currencies, rose to 72.37, up from a close of 71.86 in the previous session.

The dollar
USDJPY, -0.18%
was recently at 93.86 yen compared with ¥93.67 before the Fed minutes, and ¥93.45 in New York late Tuesday.

Against the yen, the dollar earlier Wednesday turned slightly higher after data that showed the longer-term recovery in the U.S. housing market was still on track.

A Commerce Department report of a drop in U.S. housing construction in January also showed longer-term housing starts were up 24% from the year-earlier period. At the same time, building permits, a sign of future demand, rose to the highest rate since June 2008, and December’s starts rate was upwardly revised to 973,000.

The yen had been higher earlier in the day after Japanese Prime Minister Shinzo Abe reportedly told the Japanese parliament that the need to create a fund to buy foreign bonds was declining, but the currency later gave up gains.

Also aiding the yen’s weakness earlier in the day were official data which showed that Japan’s trade deficit for January ballooned to ¥1.63 trillion from ¥641 billion in December. Read more about Japan’s trade data.

British pound hit

The British pound
GBPUSD, +0.2098%
dropped to levels not seen since January 2012, falling to $1.5233 compared with $1.5427 in North American trade late Tuesday.

“The [Bank of England] is doing its best to break the equilibrium in the British pound and has by all accounts succeeded,” said Sebastien Galy, currency strategist at Société Générale, in a note.

Sterling slumped after minutes from the Bank of England’s February meeting showed that three members of its nine-person Monetary Policy Council, including Gov. Mervyn King, voted for a 25 billion pound ($38.3 billion) rise in the bank’s asset-buying program, the centerpiece of its quantitative-easing strategy, to £400 billion. See: Bank of England voted 6-3 to leave QE on hold.

Just one member, David Miles, had pushed for a rise in asset purchases in the January meeting. The growing support surprised market participants.

“As February’s minutes show, the MPC [members] are becoming more willing to increase QE. Given the fragile nature of U.K. growth, any major disruption in the global economy this year may lead to an expansion in the program,” said Katie Evans, an economist at the Center for Economics and Business Research, a London consulting firm.

Kiwi kicked lower

Also Wednesday, the New Zealand dollar, also known as the kiwi, got hammered after Reserve Bank of New Zealand Gov. Graeme Wheeler said the central bank “stands ready to intervene in the currency when circumstances are right.”

The kiwi
NZDUSD, +0.1785%
slumped to 83.89 U.S. cents from about 84.65 cents in North American trade. The New Zealand currency was trading at about 75 cents in June last year.

“With such strong language from a relatively new governor, Wheeler may find himself with a credibility issue should [the kiwi] move higher and no action be forthcoming,” Michael Turner, a fixed-income and currency strategist at RBC Capital Markets, wrote to clients.

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